Time To Pile Back In? Not So Fast

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Includes: DIA, ECA, GLD, IWM, QQQ, SPY
by: Orange Peel Investments

Summary

Markets have rallied the last three days, with a fourth rally potentially on tap.

Oil is moving higher after OPEC production freeze.

Has the bottom come in? Time to pile back into stocks? Not so fast.

By Parke Shall

If you're thinking about piling in without rhyme or reason to get back into the market here, you may want to hold up.

The last three trading days have been nothing short of euphoric. It looks as though the market is finally set to rebound and steady itself after what has been a very volatile last few months. Over the course of the last month, every rally looked like it should have been faded, except for these last three days, where the market has strung together a streak of winning days.

^DJI Chart

^DJI data by YCharts

It also appears, judging by the futures this morning, that we are going to be looking at a fourth straight day of positive territory, of course depending on whether or not the market will hold its gains through the day.

The question I have been asked over and over is whether or not we think in the bottom is in here and whether or not this is a safe spot to come in and start buying the dips.

As we said in a previous article, we believe that we are in a "stock pickers market". What this means to us is that we are at a time where we can no longer throw a dart, go long a company, and make money off of it. The bull market is over.

We also said in one of our previous articles that we don't think we are in the midst of a full-fledged bear market yet, but that we do think the market is generally on neutral footing now as the Dow sits between 16,000 and 18,000. We think that in an environment like this, the best way to assert yourself is to make smart choices about companies that look to be undervalued and fundamentally strong with great balance sheets. This is not the market where we would step in and start buying high momentum high PE stocks for anything that is speculative and without a great balance sheet to back it up.

This is why high momentum names continue to get hit the hardest.

^SPX Chart

^SPX data by YCharts

We rallied a little bit yesterday on decent macro economic data and the sentiment that rate hikes may be done in abbreviated fashion this year. The consensus is now for 1 to 2 rate hikes for the rest of the year, as opposed to 4 rate hikes that were originally planned for this year. The FOMC commentary that was released yesterday showed concern for the global economic picture and assured equity investors that the Federal Reserve is still on the case and potentially looking for ways to stimulate the markets.

We are getting the same sentiment from overseas as central banks across Europe and Asia are doing everything possible to try and stimulate their global markets as well.

Oil has moved up over the last two days, which has helped out the global markets. It first moved up starting a few days ago on the news that OPEC was looking for a production freeze, and that although Iran would not be participating in the freeze or in the cuts that its oil minister made comments that he was in favor of any type of decision that would help stabilize the market price.

Of course, what he says and what he does will likely be two different things. Another negative that has been weighing down the US market is the counterparty risk of oil company debt.

^SPX Chart

^SPX data by YCharts

We have seen this take the banks outside and shoot them. Banking stocks have gotten decimated over the last few months because there is a significant amount of fear that natural gas companies and oil companies are looking bankruptcy dead in the eye and that banks may have too much exposure to this type of debt.

However, we do not believe this to be the bottom by any means for the market, so if you're thinking about piling in without rhyme or reason, you may want to hold up. Don't expect to step in and invest here and see your money only move in one direction - up. We think that there is going to be turmoil on the horizon that is still going to be driven by the strength of the dollar in the weakening of the global economy.

Macro economic data from Asia that continues to come out continues to miss night after night, whether it is in Japan or China. The Italian banking system has been called into question. Oil still remains very cheaply priced relative to where it needs to be for oil companies to generate profits.

To conclude, we don't think that it is time to start celebrating yet.

We think we are definitely going to have a rough patch ahead as the global economy turns slower and central banks try to figure out one way after another to keep things moving. At some point, we believe they will hit a wall and things will get significantly worse. We are not at that time just yet, and we believe we have a year or two of trading sideways to look forward to.

The way that we are handling this is we are long our core set of equities, including some oil and gas names that we have recently added, like Encana (NYSE:ECA). We also are long gold (NYSEARCA:GLD) as a hedge against whatever voodoo the central bankers are up to. In addition to our core longs, we have a short book that encompasses a basket of stocks that we believe are either fraudulent in nature or have too much exposure to bankruptcy or economic geographies that are in trouble, like China.

Disclosure: I am/we are long ECA, GLD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.